VC 2.0: The Lean Investor (Sept 2010)
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VC 2.0: The Lean Investor (Sept 2010)

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Slides from my "Lean VC" talk at Capital Factory Demo Day (Sept 2010, Austin TX).

Slides from my "Lean VC" talk at Capital Factory Demo Day (Sept 2010, Austin TX).

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VC 2.0: The Lean Investor (Sept 2010) VC 2.0: The Lean Investor (Sept 2010) Presentation Transcript

  • The Lean VC: a Silicon Valley 2.0 Story Dave McClure, 500 Startups ( @DaveMcClure ) http://500startups.com Capital Factory Demo Day – September 2010 – Austin, TX Re-Inventing Venture Capital & Angel Investing through Innovation, Incubation, & Iteration
  • Changes, Oh.
    • Venture Capital 2.0 = Fewer, Smaller Funds (<$100M)
      • Death of Large Funds
      • Birth of Super Angel Funds
      • M&A Market Changes
    • Platforms = Distribution + Monetization (not Tech)
      • Search (Google)
      • Social (Facebook, Twitter)
      • Mobile (Apple, Android)
    • Incubators & Metrics = Many Small Experiments (most FAIL )
      • Y-Combinator, TechStars, SeedCamp
      • Betaworks, fbFund REV, Nitobi
      • 500 Startups
  • [Pardon The Blatant Commercial]
  • Dave McClure
      • 2001-2010:
      • Startup Investor: 500 Hats LLC, Founders Fund
      • Tech Marketing : PayPal, Simply Hired, Mint
      • Advisor, Angel Investor : 70+ Startups
      • Conf. Organizer : Web 2.0, O’Reilly, Startonomics
      • Stanford Visiting Lecturer : Facebook, Startup Metrics
      • 80’s & 90’s:
      • Entrepreneur : Founder/CEO Aslan Computing (acq.)
      • Developer : Windows Apps / SQL DB Admin
      • User Groups : E-Commerce, Internet, Client-Server
      • Engineer : Johns Hopkins ‘88, BS Eng / Applied Math
    GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, SuperAngel/Micro-VC
  • 500 Hats Investments (13 deals, 2004-2008, ~$300K) 2004-2008: 13 deals, avg $25K results: 1 exit @ $170M (9x ), +3-7 future wins (i hope)
  • Founders Fund Investments (43 deals, 2008-2010, ~$2.9M) Results : 8 Seed rounds @ $500K+, 3 small exits, 5 ramen-profitable) Results : 1 small exit @ 4x, 5 Series A $2M+, (expect 5+ more) fbFund REV (Facebook Incubator) 22 deals ($850K) ~$15-75K FF Angel LLC 21 deals ($2M) ~$50-250K
  • 500 Startups Investments (~40+ deals, 2010, ~$3.5M) 2010 YTD: 38+ deals, avg $100K Wildfire Crave Tello AwayFind MyGengo Recurly Mogotix EcoMom Zencoder Crocodoc SayHired RevNetics AppBistro Foodspotting Medialets Rapportive TransFS SiteJabber Estately FlowTown OneForty Twilio Postling Plancast WePay OtherInbox Viikii Zozi Graphicly Networked Blogs What Up Texas! Hi Josh 
  • 500 Startups LP Mountain View, CA – Founded 2010
    • Seed Fund & Incubator Program
    • Design , Distribution , Data ( AARRR! )
    • 40+ Portfolio Companies ($50K-250K)
      • Twilio
      • Wildfire
      • Sendgrid
      • MyGengo
      • Erply
      • Payvment
      • Zozi
      • OtherInbox
  • Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups) Venture Capitalist? Super Angel.
  • Silicon Valley Investor Ecosystem True Ventures First Round Capital Benchmark Sequoia Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars SoftTech (Clavier) FloodGate (Maples) Felicis (Senkut) SV Angel (Conway)
  • Venture Capital: Still Relevant?
    • Good 4 big CAPex:
    • Hardware
    • Enterprise SW
    • Clean Tech
    • BioScience
    • Facebook, Zynga ,
    • Groupon
    • Not So Great 4:
    • Most Consumer / SMB Internet Startups
    • Consulting Shops
    • Lifestyle Biz
    • Porn, Gambling
  • More & Smaller Acquisitions
    • Mature Internet Platform Co’s:
      • GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
    • Lots of Users, $$$
    • Outsourcing Innovation
    • Lots of M&A (but small)
    • Great for Angels & Entrepreneurs
    • Not so Great for (big) VCs
  • Platforms 2.0 Search, Social, Mobile
  • Web 2.0 : Good Times, G .
    • # Users, Bandwidth = Bigger .
    • Startup Costs = Lower .
    • Transaction$$$ = Better .
    • Building Product => Cheaper, Faster, Measurable
    • Getting Customers => Easier, More Predictable
    • Product & Market Decisions based on
    • Measured User Behavior
    R.I.P. *BAD* TIMES
  • Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  • Distribution Platforms
      • Customer Reach: 100M+
        • Search : Google (SEO/SEM)
        • Social : Facebook , Twitter, Zynga, LinkedIn
        • Mobile : Apple (iPhone, iPad), Android, Blackberry
        • Media : YouTube /Video, Blogs, Photos
        • Email/IM : Gmail , Yahoo, Microsoft
  • Web 2.0 Business Model: KISS 
    • 1) Re-invent Web 1.0 Businesses
      • Make a Website, a Widget, an App
      • Sell Stuff to People (Transactions, Subscriptions)
    • 2) add Web 2.0 Tech nology
      • Search , Social , Mobile
      • Google , Facebook , Apple
      • Email, ECommerce
    • 3) Get Customers , Make Money G
      • Distribution, Distribution, Distribution
  • Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL .)
  • Incubator 2.0: Fast, Cheap, FAIL
    • Incubators growing in popularity, acceptance
    • Supportive ecosystem for startups (angels, VCs)
    • Efficient use of investment capital ($0-100K)
    • High fail rate (60-80%) => large initial sample size
  • Incubator 2.0: Education, Collaboration, Iteration
    • Focus on education & shared resources
    • Success based:
      • many small startup experiments
      • common platforms, problems & solutions
      • physical proximity, open/collaborative environment
      • fast fail, iteration, metrics & feedback
    • Incremental investment; high-risk, but high-reward
  • fbFund REV
    • fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform & Facebook Connect.
    • 22 startups @ ~$35K each ($850K total)
    • 3 month program: Technology, Design, Marketing, Business topics
    • Success: ~ 8 startups funded >$500K – Wildfire Interactive raised $4M
  • Startup Metrics: Lean Startup & Lean VC Measure Stuff, Iterate. (Rinse & Repeat.)
  • “ Just Gimme the GOOD Leads” Users, Pages, Clicks, Emails, $$$...?
    • Q: Which of these is best? How do you know?
      • 1,000,000 one-time, unregistered unique visitors
      • 500,000 visitors who view 2+ pages / stay 10+ sec
      • 200,000 visitors who clicked on a link or button
      • 20,000 registered users w/ email address
      • 2,000 passionate fans who refer 5+ users / mo.
      • 1,000 monthly subscribers @ $5/mo
    the good stuff.
  • Lean Startup Challenges
    • Startups have problems in 3 main areas:
      • Management : Set Priorities, Define Key Metrics, Make Decisions .
      • Product : Build the “Right” Features. Measure, Iterate .
      • Marketing : Distribution, Distribution, Distribution .
  • Role: Founder/CEO
    • Q: Which Metrics? Why?
    • A: Focus on Critical Few Actionable Metrics
      • (if you don’t use the metric to make a decision, it’s not actionable)
    • Hypothesize Customer Lifecycle
    • Target ~3-5 Conversion Events (tip: Less = More)
    • Test, Measure, Iterate to Improve
  • Role: Product / Engineering
    • Q: What Features to Build? Why? When are you “Done”?
    • A: Easy-to-Find , Fun / Useful , Unique features that
    • Increase Conversion (stop iterating when increase decelerates)
    • Wireframes = Conversion Steps
    • Measure, A/B Test, Iterate FAST (daily/weekly)
    • Optimize for Conversion Improvement
      • 80% on existing feature optimization
      • 20% on new feature development
  • Role: Marketing / Sales
    • Q: What channels? Which users? Why?
    • A: High Volume (#), Low Cost ($), High Conv (%)
    • Design & Test Multiple Marketing Channels + Campaigns
    • Select & Focus on Best-Performing Channels & Themes
    • Optimize for conversion to target CTAs, not just site/landing page
    • Match/Drive channel cost to/below revenue potential
    • Low-Hanging Fruit:
      • Blogs
      • SEO/SEM
      • Landing Pages
      • Automated Emails
  • “ Lean Investor” Model
    • Method : Invest in many startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success… ( Rinse & Repeat) .
    • Incubator : $0-100K (“ Build & Validate Product ”)
    • Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”)
    • Venture : $1M-$10M (“ Maximize Growth & Revenue ”)
  • Investment #1: Incubate (“Product”)
    • Structure
      • 1-3 founders
      • $25K-$100K investment
      • Incubator environment: multiple peers, mentors/advisors
    • Build Functional Prototype / “ Minimum Viable Product ” ( MVP ):
      • Prototype->Alpha, ~3-6 months
      • Develop Minimal Critical Feature Set => Get to “ It Works ”
      • Instrument Basic Dashboard, Conversion Metrics
      • Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)
    • Demonstrate Concept, Reduce Product Risk, Test Functional Use
    • Develop Metrics & Filter for Possible Future Investment
  • Investment #2: Seed (“Market”)
    • Structure
      • 2-5 person team
      • $100K-$1M investment
      • Syndicate of Angel Investors / Small VC Funds
    • Improve Product, Expand Market , Test Revenue:
      • Alpha->Beta, ~6-12 months
      • Customer Sat ≥ 6 => Get to “ Doesn’t Suck ”
      • Setup A/B Testing Framework, Optimize Conversion
      • Test Marketing Campaigns, Cust Acqstn Channels
    • Prove Solution/Benefit, Assess Market Size
    • Test Channel Cost, Revenue Opportunity
    • Determine Org Structure, Key Hires
  • Investment #3: Venture (“Revenue”)
    • Structure
      • 5-10 person team
      • $1M-$5M investment
      • VC Investors
    • Make Money , Get to Sustainability:
      • Beta->Production, 12-18 months
      • Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ”
      • MktgPlan => Predictable Channels / Campaigns + Budget
      • Scalability & Infrastructure, Customer Service & Operations
      • Connect with Distribution Partners
    • Prove/Expand Market, Operationalize Business
    • Future Milestones: Profitable/Sustainable, Exit Options
  • Summary
    • Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)
    • Platforms 2.0 = Distribution + Monetization, not Tech
    • Incubators, Metrics = Many small Experiments (most FAIL ).
      • Measure Stuff.
      • Iterate, Iterate, Iterate.